The company expects to use the proceeds from the issuances to finance
its capital investments, pay upcoming maturities and for general
corporate purposes. The debt issuances are guaranteed by Pemex
Exploracion y Produccion; Pemex Cogeneracion y Servicios; Pemex
Perforacion y Servicios; Pemex Logistica; Pemex Transformacion
Industrial and their respective successors.

KEY RATING DRIVERS

Pemex's ratings reflect its close linkage to the government of Mexico
and the company's fiscal importance to the sovereign and strategic
importance to the country. Pemex's ratings also reflect the company's
competitive pre-tax cost structure, national and export-oriented
profile, sizable hydrocarbon reserves and its strong domestic market
position. The ratings are constrained by Pemex's substantial tax burden,
significant unfunded pension liabilities, large capital investment
requirements, negative equity and exposure to political interference
risk.

Strong Linkage to the Government

Pemex is the nation's largest company and one of the Mexican central
government's major sources of funds. During the past five years, Pemex's
transfers to the government have averaged 49% of sales, or 126% of
operating income. These contributions, through royalties, exploration
taxes and production duties have averaged between 27% and 37% of
government revenues. As a result, Pemex's balance sheet has weakened,
which is illustrated by its significant increase in debt and negative
equity balance sheet account since the end of 2009. Pemex's debt lacks
an explicit guarantee from the government.

Strategically Importance for Energy Security

Pemex's linkage to the sovereign also arises from the company's
strategic importance for the supply of liquid fuels to Mexico. A
financial distress situation at Pemex holds the potential to disrupt the
supply of liquid fuels in the entire country, which could have material
social and economic consequences for Mexico, as it is a fundamental
input into the production of almost all goods, as well as the mobility
of goods and labor. Although Mexico is a net exporter of crude oil, the
company relies on the import of basic oil products, including dry gas,
petroleum products and petrochemicals, in order to supply local demand.

Historically, the company was the only entity allowed by the
constitution to explore and produce crude. The industry was open to
private participation at the end of 2013 and so far there has been
modest interest in upstream investments. Interest in Pemex's downstream
businesses does not appear imminent, and over the short- to medium-term
the country will continue to rely on Pemex's operations for its domestic
liquid fuel supply. Mexico could see an increase of private
participation in the supply and distribution of liquid fuels after price
regulations decrease materially or disappear and fuel prices are
determined by a competitive market, which might happen in the short term.

Symbolic Government Support

Mexico's support of Pemex has been evidenced in recent months by the
Ministry of Finance's public statements of support, as well as announced
modest capital injections and marginal tax reductions. This support has
been so far more symbolic than material, and Fitch expects the Mexican
government to execute more meaningful support actions when the company
needs them. In April of 2016, the Mexican government injected
approximately USD1.5 billion of new capital into Pemex. Pemex also
received capital to fund pension liabilities and credit lines for an
aggregate amount of MXN15 billion from the country's development banks:
Banco Nacional de Obras y Servicios Publicos, S.N.C. (Banobras),
Nacional Financiera, S.N.C. (Nafinsa) and Banco Nacional de Comercio
Exterior, S.N.C. (Bancomext).

Weak Stand-Alone Credit Quality

Pemex's stand-alone credit quality would be in line with a 'B-'
long-term rating if the company was not owned by the state and if the
government did not provide financial support should Pemex require it.
This stand-alone view also assumes that the Mexican government continues
to extract a large amount of funds from Pemex in the form of taxes and
duties, resulting in weak funds from operations (FFO). Pemex's
stand-alone credit profile has been weakened in recent years by the
significant increase in debt the company has issued primarily in order
to cover its large transfers to Mexico in the form of taxes, duties and
royalties. Pemex's debt trajectory could continue to pressure the
company's stand-alone credit quality, which could reach an unsustainable
level, should the Mexican government continue issuing debt at Pemex's
level to transfer funds to the central government. Pemex made transfer
payments in the form of taxes and royalties to the government equal to
1.3x its EBITDA during 2015. The company covered its 2015 negative FCF
of USD13.8 billion mostly with debt issuances.

As of the last 12 months ended Sept. 30, 2016, Fitch calculated Pemex's
EBITDA (operating income plus depreciation plus other income) was
approximately USD12.8 billion after adjusting for asset impairments and
pension liabilities associated gains while cash flow from operations was
negative for the same period. The significant difference results from
the considerable transfers to the government. Pemex cash flow metrics
are weak due to the company's high cash transfers to the government in
the form of taxes and production duties. Leverage as measured by total
debt-to-EBITDA was approximately 7.8x in USD terms. As of Sept. 30,
2016, total debt was approximately USD99 billion. Pemex's total
debt-to-proved reserves have grown to approximately USD10/boe from
USD6.3/boe as of year-end 2014. Pemex's leverage could reach an
unsustainable level over the next two to three years absent further
changes to reduce its tax burden.

Capex Cuts to Reduce Production

Fitch expects Pemex's production to continue declining over the next few
years as a result of the significant capex cuts in exploration and
development in order to counter the decline in oil prices while
maintaining relatively high transfers to Mexico. The diversification of
the oil production asset base, with Cantarell representing less than 15%
of oil production, reduces the risk of large production declines in the
future. The company's previous goal was to increase total crude
production to three million barrels per day (bpd) in the medium- to
long-term, which in Fitch's view, has proven challenging. Pemex's
current goal for 2016 is to have a crude production of approximately 2.1
million bpd.

Currently at approximately 2.2 million bbd, crude oil production has
continued to decline marginally in recent years. Natural gas production
excluding nitrogen has been relatively stable during recent years at
approximately 5.5 billion cubic feet per day (bcf/d). Pemex was able to
stem the steep production decline through more intensive use of
technology, improvements in operations, and increased production from a
diversified number of fields. Pemex's recent success with its deep-water
farm-out is very long-term positive for the company, as it may see
incremental production come on line in approximately seven years with
lower government take and little cash outflows.

--WTI crude prices average USD42 per bbl in 2016, increasing to USD65
per bbl by 2020;

--The company continues to face difficulties increasing its production
over the next four years;

--Pemex will receive support from the sovereign.

RATING SENSITIVITIES

Although not expected in the short term, an upgrade of Pemex could
result from an upgrade of the sovereign coupled with a strong operating
and financial performance and/or a material reduction in Pemex's tax
burden. Negative rating action could be triggered by a downgrade of the
sovereign's rating, the perception of a lower degree of linkage between
Pemex and the sovereign, and/or a substantial deterioration in Pemex's
credit metrics.

LIQUIDITY

Pemex liquidity is supported by the company's cash on hand of
approximately USD10.7 billion as of Sept. 30, 2016. The company had
available committed revolving credit lines of USD1.25 billion and
MXN23.5 billion; as of Oct. 28, 2016. The company's debt amortization
schedule is well balanced, with somewhat manageable short-term debt
maturities. Its liquidity is further bolstered by pre-tax cash flow
generation supported by its competitive operational cost structure.
Fitch estimates Pemex's operating cash cost to be less than USD24 per
barrel of oil equivalent, including interest costs and full allocation
of administrative expenses to the upstream business.

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